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US seeks deal to avoid 'economic Armageddon'

Experts warn that failure to raise the US debt ceiling by August 2 would send shock waves through world economy.

21 Jul 2011 21:02 GMT

Boehner, the House speaker, said it is time for Obama to 'step up' his efforts to find a solution to the debt crisis [AFP]

The White House has said "momentum" has been seen towards a deal to avert a disastrous early August debt default, but denied media reports that a compromise with top lawmakers is in the works.

President Barack Obama and John Boehner, the speaker of the House of Representatives, were believed to be discussing a possible deal that would include tax reform and $3tn in spending cuts over 10 years to avert the unprecedented default, a senior Democratic congressional told the Reuters news agency on Thursday.

Finance and business leaders have warned failure to raise the US debt ceiling by August 2 then would send shock waves through the world economy, while Obama has predicted a default would trigger economic "Armageddon".

In reaction to the potential agreement, Harry Reid, the senate majority leader, underscored the divisive nature of the issue by saying any deficit-cutting deal aimed at winning a debt limit increase must contain revenue boosts as well as the spending cuts.

"This can't be all cuts, there has to be a balance," Reid said.

He was responding to reporters' questions about the possible deal’s stipulations that would leave tax reform and revenue increases for a later date.

Debt deadline looms

The report of a break in the partisan deadlock comes with time running short before the deadline to raise the $14.3tn US debt ceiling.

"We believe there is momentum behind the idea of a balanced approach to a significant agreement," Jay Carney, the White House spokesman, said.

But Carney rejected a New York Times report, citing anonymous congressional officials, that aides to Obama had informed important legislators that a deal was in the works with Boehner, according to the AFP news agency.

"There is no deal. We are not close to a deal," Carney said. "The fact is that there is no progress to report, but we continue to work on getting the most significant deficit-reduction package possible."

As AFP reported, such an agreement would likely anger Democrats pledged to protect the US social safety net as well as Republicans who have vowed to oppose increasing revenues, dimming its prospects for passage in the divided congress.

'Not enought to wait'

the US hit its debt ceiling on May 16 and has used spending and accounting adjustments, as well as higher-than-expected tax receipts, to pay its bills and continue operating normally, but can only do so until August 2.

The largest US creditor, China, has twice warned that the US must protect investor interests, while ratings agencies Moody's and Standard & Poor's have said the sterling Triple-A US debt rating was in danger of a downgrade.

Word of a deal came after Boehner told AFP that he had prepared his Republican majority in the House for the possibility of having to support a potentially difficult compromise.

Boehner acknowledged that some Republicans would reject any debt-ceiling compromise with Obama and his Democratic allies, "but I do not believe that would be anywhere close to the majority".

But Boehner warned it was time for Obama to "step up" his efforts to find a solution and stressed: "It's not enough to wish or to wait for a solution to materialise."